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BEEF Chat: Inside Costco

Costco Wholesale&#39;s unique set of beef merchandising philosophies sets it apart from its competition in beef retail.
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Read more BEEF interviews with industry leaders here.

Clint Peck, Senior Editor | May 01, 2003

You can buy everything from an emerald-cut diamond to a truckload of toilet paper at a Costco Wholesale warehouse store. If you're among the bourgeois of American beef consumers, Costco is, by consensus, the place where you can always find a package of great steaks for tonight's backyard barbeque.

While quality and value are the standard marketing modus operandi, don't mistake your local member-driven Costco Wholesale for a discount store — certainly when it comes to a place to buy your beef.

Charlie Winters, vice president of Costco Wholesale's fresh meat operations, got his start in the meat business working in a small, family owned slaughter facility in Aztec, NM. Winters, 56, pioneered Costco's fresh meat department in 1987 at the Southcenter warehouse in Tukwila, WA. What began as a small selection of deli items and fresh meats serving Costco members in that south Puget Sound community is now one of the nation's largest fresh meat retail programs.

Today, Costco sells about 150 million lbs. of ground beef annually; a little more than that in muscle meats. With beef making up 18-19% of Costco's fresh meat sales on a value basis, Winter's group, which includes Jeff Lyons, Chris Ostrander, Doug Holbrook and Teri Free, is one of the largest buyers of beef in the U.S.

BEEF Chat With Charlie Winters

Winters: Our focus has always been product consistency. It takes diligence and discipline to deliver a quality product with consistency. When I first came here and started this program, we agreed quality would be the driving force behind the fresh meat program. That was supported by all the other Costco philosophies of managing a retail warehouse business.

Winters: USDA Choice is the only grade we offer our members. It fits with the profile of our customer base — higher-end shoppers who have more disposable income and for whom cost isn't necessarily the only factor in their buying decisions.

Kirkland Signature is our private label. It's a name we've built over time and is well recognized among our members as a quality label, for a lot of different products. We're very exact in how we cut the beef in our warehouses so that every member gets the best possible eating experience.

BEEF: The hot issue the past few years with regard to beef has been food safety. What are your food safety initiatives today?

Winters: Food safety is a big part of our business; it has become part of our culture. We've established sanitation standard operating procedures and hazard analysis and critical control point programs over the past five years in every building.

Costco also audits all its vendors — and we accept outside food safety audits of their facilities. We're relentless about our buyers being inside the plants on an on-going basis.

Our seamless tracking system allows us to follow every pound of beef produced in our system to the supplier. Our ground beef program produces a half-million pounds each day, and we can effectively collect and analyze data on the microbiological quality of every single grind.

BEEF: How do things look from a supply standpoint?

Winters: Supplies are probably going to be tighter in the short-term. We use all the major U.S. packers and processors, and as the business changes we move from one vendor to another. Obviously, we need a good source of continuous supply, but, in general, supply and demand works very well.

All the proteins have to compete on a value basis, so we're probably going to see our beef volumes slow a bit as prices continue to escalate to cover those live cattle costs. Therefore, consumers may make other choices when prices get to a threshold they're uncomfortable with. I don't think supply will be a huge issue though.

Winters: We're just now getting some meaningful information regarding that issue. I'm not sure anyone can prove it serves a great purpose and, at retail, we're still unclear as to what the final outcome will be — and how to do it. We're looking at a tracking system, how to verify country of origin and how to house the information that will be required of us.

In the end, we'll have to figure it out and deal with it. At this point, we don't have enough information to know what's going to be acceptable at the retail level.

BEEF: Will your members be willing to pay a premium for beef or pork labeled as born, raised and processed in the U.S.?

Winters: I don't think country of origin represents any value to the consumer. Our members aren't saying this is something important in their buying decisions. They're more focused on food safety and value — especially in these tougher economic times. They're more concerned about the ultimate eating experience — quality, consistency and value.

BEEF: The beef industry has changed a lot in the 15+ years Costco has been in the business. Are you concerned that consolidation in meatpacking is going to come around to haunt the retail sector?

Winters: With consolidation in the packing sector there's always uncertainty about who will be in charge of the supply. We're always looking for long-term relationships with vendors — and it really comes down to the individual relationships with the people in those companies. We're more concerned about who's going to end up with the largest piece of the pie — and whether we can depend on those long-term relationships.

Like every good buyer, we're never satisfied that we got the best deal at the lowest price. A new competitor is always welcome because it makes everybody sharper. I would hate to see more consolidation — it would not be to anyone's advantage; the producer or the consumer.

Winters: The items we manufacture and sell in volume depend on consistency of supply from the cattle that are out there. If anything, we need to narrow the genetics as has been done in the pork industry to get more consistency in the live animal.

More information needs to be shared between the grower, feeder and packer about all the things that combine for profitability. That, in the end, translates into the best possible eating quality for the end-user.

That said, the beef industry has to drive out some costs all the way through the chain. There are several profit centers in it that the pork or poultry complexes don't have. The beef industry has to get more efficient to compete with the other proteins.

BEEF: Some retailers are exploring alliances with packers, feeders and even cow-calf producers. Is this a concept Costco might buy into any time soon?

Winters: It's not even on the radar screen for us. We can get more involved as buyers as far as how products come to us — the specs and those kinds of things. But, as long as we're buying a certain product, there will be someone out there willing to make it available to us.

The way Costco has grown, we've created quite a demand and we try to get across to the beef industry that we're trying to build the business and that we have a vested interest in the beef industry. Give us some recognition for providing the red meat complex with the kind of high-quality format where we “feature” your best product 52 weeks out of the year.

The Costco Profile

Costco began operations in 1983 in Seattle, WA. In October 1993, Costco merged with The Price Company, which in 1976, pioneered the membership warehouse concept.

A publicly traded company, Costco's philosophy is to sell high-quality nationally branded merchandise, as well as its own private label. The business is based on high volume and rapid inventory turnover — offering a limited assortment of merchandise in a wide variety of product categories.

Headquartered in Issaquah, WA, the firm includes 411 membership warehouses in 36 states, Puerto Rico, Canada, Mexico, United Kingdom, Japan, South Korea and Taiwan, serving 38 million customers a day.

Costco is the seventh-largest U.S. retailer with sales in 2002 of $37.98 billion, is the fifth-largest food retailer, and has 100,000+ employees.